No Triple-Dip: UK Economy Fears Ease

Kiran Moodley, special to CNBC.com

Thursday, 4 Apr 2013 | 8:38 AM ET

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City of London

Strong data from the U.K. services sector in March, coupled with rising retail and consumer confidence, may indicate an improving British economy, easing worries that it could enter a triple-dip recession.

Data released on Thursday show an improving services sector, which represents 77 percent of the country's gross domestic product (GDP).

The purchasing managers' index (PMI) for the sector jumped to 52.4 in March from 51.8 the previous month. That is the fastest rate of expansion month-on-month since August 2012 and the third successive monthly increase.

"The survey significantly lifts hopes that expansion in the dominant services sector in the first quarter was more than enough to offset probable contraction in both industrial production and construction output, thereby preventing a further GDP drop and triple-dip recession," said Howard Archer, chief European and U.K.economist at IHS Global Insight.

Investec chief economist Philip Shaw echoed those views, saying, "It's a decent indicator and we do place some weight on it in assessing where the economy is, so at least the service sector, or the majority of the service sector, which the PMI covers, appears to be growing, albeit modestly."

The improving economic picture may be part of the reason the Bank of England decided not to announce further stimulus and to keep rates unchanged on Thursday.

Philip Shaw, chief economist at Investec, tells CNBC the Bank of England will keep its focus on short-term growth and the inflation outlook in the medium to long-term.

The good news from the services sector has also been mirrored by positive data from U.K. retailers and consumers, according to Alliance Bernstein. The firm's research indicates improving disposable income, steady employment and greater consumer confidence, reflected in better retail sales.

U.K. retailer Asda's disposable income tracker suggests an average 2.3 percent growth in household income in January and February, according to Alliance Bernstein.

Retail sales in February grew 2.7 percent, below the 2.9 percent five-year historical average but still the highest growth rate since September last year.That's been combined with a slow increase in U.K. consumer confidence, which while still -26 in March 2013, has risen from -33 in December 2011.

A slowly improving situation will be good news for George Osborne, who had to halve the U.K.'s growth forecast for the year ahead to 0.6 percent in his 2013 budget two weeks ago.

But IHS's Archer was still cautious, despite the promising economic data. "We expect the economy to have squeezed out GDP growth of 0.1 percent to 0.2 percent quarter-on-quarter in the first quarter," he said. "But there is obviously major uncertainty over what the outcome will be."

"We are looking at a strengthening economy, but that's a pretty low bar to be aiming for," Investec's Shaw told CNBC. "We ought to be looking for how do we get onto a sustainable economy."